QE 3D: The summer blockbuster

Commodity Bulls Rejoice! QE 3D may be coming soon to a screen near you! Your friends at the Fed seem to be unhappy with the commodity markets returns so why not raise the stakes and juice them up! QE 3D! If you liked QE2 then you are going to love the 3d version. Fed Chairman Ben Bernanke reaffirmed the possibility that the FED may get ready to run the printing presses again and in the process hey may be getting  be getting ready to print another bottom  in commodities and drive prices for commodities once again to spectacular levels.  The Fed and its magic printing press can do amazing things for commodities and may be forced to act to provide cover for the US government that got another warning about its credit rating.

This time it was Moody’s that said that the U.S. AAA government bond rating and related ratings are on review for a possible default. The warning was because the possibility that the statutory debt limit may not be raised on a “timely basis”. While they say the risk is small it is no longer “De Minimus” which is a Latin term that basically means a risk  so small that you barely even worry about it and came at a time when talks between the Republicans and the White House have become more contentious.

So the Fed feels it has no choice but to back up the economy by laying the bombshell of the possibility of a QE3. If the United States defaults it looks like bonds could crash and the Fed would start to print money like crazy to soften the blow.  But what will a QE3 look like and will the Fed structure it in such a way where the money gets into the economy instead of the pockets of the Banks, emerging markets, and commodity traders.

Not that I have anything against it going into the pockets of commodity traders but I think the Fed may try a more inventive way of trying to force the liquidity into the economy. Perhaps they will dictate that the banks will have to lend the money that they get or not take it at all. Or perhaps the Fed will get in the business of lending money out directly to different entities. That’s why QE3 is 3D because if it is going to work it is going to have to have a different dimension to it. Scary! That is almost as scary as a possible default by the United States government.

In the meantime while we can speculate what a QE 3D might look like the one thing we know is that it will be bullish for commodities. A concept that when QE 1 happened was hard for me to convince people of.  Even the Federal Reserve has been in a bit of denial about the wildly bullish aspects of quantitative easing. They focus just on the hard data such as the value change of the dollar or the different exchange rates but fail to acknowledge the psychological impact on price.

QE creates inflation and money out of thin and that changes the perceived values of a hard asset like a commodity. Short sellers are afraid to be short because more cash makes upside price moves in commodities more likely. Quantitative easing is as stimulative to the economy as an interest rate cut but is more inflationary. The Fed is worried after a subpar jobs report and the possibility of default so they have but the commodity bears on notice. Sell at your own risk because the Fed just may increase the value of that commodity asset at anytime.

Oil though was not as strong as gold and silver even with a bullish Department of Energy  report. That is because the threat of QE3 and oil demand data in China is worrying the traders that things are worse in the economy than previously thought. If gold and silver continue to soar oil will follow but at a more cautious pace.

Grain and natural gas got some help with the heat dome that has hit the country. Natural gas should see an injection of 78 bcf’s today but weather is the key driver for natural gas and grains. SCB reports says that “Combined with a bullish DOE report for energies, outside markets gave the already bullish ethanol market all the support it needed to make another rise over 5¢ for the day. The tight supplies and rising feedstock costs have pushed spot ethanol to levels we have not seen in years since the 2008 highs across the market with prompt Argo trading over $2.90 and New York Harbor is seeing July numbers over $3.00.”

Weather forecasting site Wrist says that it is going to be hot and dry. The current heat dome will expands into a large impressive heat dome covering almost all of the central and upper Plains and the Midwest July 17-20.   Many areas underneath this dome are going to see temperatures from 95 to 102° depending on location the soil moisture levels and how close they are to the drought areas over the Delta / Lower Plains regions. The model moves the dome eastward starting on the 19th and 20th so that it’s located over MO and Ill  and then eventually the dome is centered over IND OH   and KY by July 26   Again this is in very close agreement with the early morning models so the consistency here is quite good and that leads to increased forecaster confidence. Eventually the core of the heat dome does break down as it moves in to KY and VA.  However the heat ridge is still very large and powerful and still covers almost all the plains and the Midwest and Deep South regions.  The model continues to show that a cold front will begin to drive into MT ND SD MN WI … and eventually into NEB and IA   by the 24th and 25th this front   will bring showers and thunderstorms with its approach and passage as well as end to the heat.   Now if QE 3d was anything like the last two quantitative easing commodities could be getting ready to take off. The RISK will be high but if QE 3D is anything like its predecessors it may be time to think about taking some risk capital and open your account!

Futures Magazine